Everything to know about reverse mortgages
If you're struggling with the rising costs of inflation, tapping your home equity may provide some relief. With products like cash-out refinances, home equity loans or HELOCs, you can turn that equity into cash and use it for any purpose — whether it's to fund home renovations, pay off debt or even just cover monthly expenses.
If you're a senior, you also have a fourth option: A reverse mortgage.
This unique opportunity isn't available to everyone but, if you need cash, it may be worth pursuing. Check out what you can qualify for now.
What is a reverse mortgage?
A reverse mortgage is a type of mortgage loan that works in reverse. Instead of you making monthly payments to your lender, the lender makes payments to you. This might be a one-time, lump-sum payment, a line of credit or monthly payments over many years. Reverse mortgages are only for seniors — so borrowers 62 and older. In some cases, lenders may allow down to 55.
How does a reverse mortgage work?
Reverse mortgages allow you to pull from your home equity. You can think of them as an advance on your home's eventual sale. The lender pays you or gives you a line of credit to withdraw from, and once you no longer live in the home (you sell it, move to a long-term facility or pass away), the balance comes due. You or your heirs can then repay the lender out of pocket or via your home's sale proceeds.
While you're in the home, you make no payments to your lender. You also won't owe taxes on the reverse mortgage payments you receive either. The IRS considers them loan proceeds — not taxable income.
How much money can you get from a reverse mortgage?
A lot of factors impact how much money you can get from a reverse mortgage, including the age of the youngest borrower, how much equity you have in your home and the type of reverse mortgage loan you're choosing.
With a Home Equity Conversion Mortgage (HECM) — a type of government-backed reverse mortgage — you can receive up to $970,800. Some lenders offer private loan options that offer well into the millions.
If this sounds appealing to you, you can easily get started right now. Lenders can assist you and let you know how much money you can potentially get out of your home.
How much does a reverse mortgage cost?
There are several costs associated with reverse mortgages. First, there are upfront closing costs. These include origination fees, appraisal fees, title search fees, costs for a credit check and more. The cost of these fees varies widely by lenders, but on HECMs, just the origination fee can equal as much as $6,000.
You will also owe a Mortgage Insurance Premium (MIP) on HECM loans. Upfront, this costs 2% of your total reverse mortgage amount. And you'll pay the MIP annually — 0.5% of your outstanding loan balance — and may have a monthly service fee (this is capped at $30 to $35, depending on the type of interest rate you have).
Your lender may let you finance your closing costs and use your loan payments to cover them but it will reduce the amount of cash you can access in the long run.
What are the basic requirements to get a reverse mortgage?
If you're using a government-backed reverse mortgage (HECM), you'll need to be at least 62 years old to qualify.
You will also need to:
- Own your home or have paid down a significant amount of your mortgage
- Live in the house as your primary residence
- Be current on all federal debts
- Have the funds to continue paying property taxes, home insurance premiums and HOA fees
- Participate in a HUD-approved HECM counseling session
Private reverse mortgages may have different requirements so make sure you do your homework.
Who would benefit from a reverse mortgage?
Reverse mortgages can be helpful if you need extra income in retirement. They also help free up cash flow, as they eliminate your monthly housing payments.
A reverse mortgage isn't a good idea if you don't have the money to cover insurance and taxes on your property. HECMs require borrowers to stay current on these charges while they live in the home. Failing to do so could lead to foreclosure.
Two more things to know about reverse mortgages
If you're considering a reverse mortgage, make sure you have a plan for your property should you pass away. While you can still leave the home to an heir, they will be responsible for any loan balance you leave behind. This might mean paying off your reverse mortgage out of pocket or, in many cases, selling your home to repay the lender. In most cases, the balance will come due in 30 days.
Finally, be diligent when choosing which lender to work with. Reverse mortgage scams are common, so learn to recognize the red flags. These might include high-pressure sales tactics or not disclosing the fees and risks associated with these loans.
You should search and compare lenders to find the best one for you. You can easily start the process today.
Consider cash-out refinancing, too
If a reverse mortgage doesn't sound like it will help fulfill your financial goals then consider cash-out refinancing, instead. The process works by replacing your current mortgage with a larger one, then using those funds to pay off your existing loan. You receive the excess amount (the difference between your new loan balance and your old one) back in cash.
You can potentially receive a large amount of money by going this route (maybe even larger than if you did a reverse mortgage since the latter is dependent on the equity in your home). You can then use this money to pay down debts or simply as a reliable source of income to pay bills and expenses.
The benefits of cash-out refinancing are multiple. Explore your options now and see what you can qualify for.
